The stamp duty — a tax to be paid on the transfer of certain legal documents — has a long history in England. It was first introduced in 1694 to help finance the war against France. Although initially thought as a temporary solution, the tax was so successful in raising revenue that it eventually evolved into a permanent form of UK taxation. While in recent decades global competition has reduced the scope of stamp duty on the trade of financial assets, stamp duty on transactions of land and property is today more significant than ever. Revenue from the stamp duty land tax (SDLT) has almost tripled over the last eight years, from £2.9bn in 2008-09 to £8.6bn in 2016-17.
The SDLT (commonly labelled ‘stamp duty’) has long been criticised by economists as being inefficient. The central case against it is that it hampers household mobility. The 2011 Mirrlees Review neatly summarises the key argument:
“By discouraging mutually beneficial transactions, stamp duty ensures that properties are not held by the people who value them most. It creates a disincentive for people to move house, thereby leading to potential inflexibilities in the labour market and encouraging people to live […] in properties of a size and in a location that they may well not otherwise have chosen.”
There are some prior studies documenting a negative effect of the stamp duty on housing transactions and mobility, but to date we know little about the nature of affected moves. Specifically, there is no evidence of the relative importance of the SDLT for the functioning of housing and labour markets. In a new article, published in the Journal of Urban Economics (Hilber and Lyytikäinen, 2017), we provide some answers by exploring the impact of the SDLT on different types of mobility.
Before 2014, the UK stamp duty had the odd feature that the tax rate for the whole purchase price jumped at certain thresholds. For example at £250,000 the rate jumped from 1% to 3% of the value (a £5,000 increase in tax liability). We exploit this discontinuity to isolate the impact of the stamp duty from other determinants of mobility. Essentially, we compare mobility rates of otherwise similar homeowners with self-assessed house values below and above the threshold.
The “slab” structure of the SDLT was replaced with a more progressive “slice” schedule in 2014. Our data is from a period before the reform and we utilise the discontinuities of the old system to identify the impact of the SDLT. The results are, however, informative of the effects of SDLT on mobility in the current system too. The reform removed the discontinuities in the tax liability and the bunching of transactions just below the old thresholds. However, it did not alter substantially the overall tax burdens, somewhat lowering them at the bottom end and increasing them at the top end of the price distribution. Thus the tax-induced disincentive to move remained.
